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Cut against the bias

One of the primary arguments made in the FSA&#39s consultation paper 121 which proposes scrapping polarisation is that there is commission bias at work in the IFA sector.

It uses this as justification for a radical overhaul of the way that independent advisers are remunerated, which would force IFAs to charge fees and rebate commission.

However, the proposals do not prevent tied or multi-tied advisers from operating on a commission basis.

Research by consultancy Charles River Associates for the FSA states: “Our market research findings suggest that the tied sector displays little, if any, evidence of bias.”

It also states that tied agents are primarily remunerated through a basic salary and may get bonuses on reaching a sales target. IFAs also point to the fact that many direct salesforces only offer one type of product, so the issue of higher commission rates is not a factor.

But to compare IFAs with tied agents when looking for evidence of commission bias is a futile exercise, according to the industry.

The two are completely different animals. They provide different services to consumers and are rem-unerated differently.

IFA Legacies Asset Man-agement senior adviser Nick Plumb says: “I think it is ridiculous to compare the IFA sector with the tied sector. The tied sector only has one product to sell. Of course there won&#39t be any evidence of commission bias.”

If one accepts the FSA claim that there is commission bias in certain product areas such as distribution bonds and with-profits bonds, then one is faced with the question, why allow remuneration through commission to continue for multi-tied agents?

If consumers are suffering to the tune of £140m, why is the regulator not eliminating advisers earning through commission altogether? How are multi-tied agents going to be better at avoiding this temptation?

If anything, one would think it will be more difficult with a limited pool of four to five providers competing head-on for the firm&#39s business.

Aifa director general Paul Smee says: “The only way multi-tied agents will be less prone to bias is if all the providers agree to pay the same commission rates.”

But the FSA plans to compel IFAs into a “defined-payment system”, which many fear will scare away consumers while all-owing multi-ties to continue to be remunerated by commission.

However, another piece of FSA research commissioned for CP121, from Cap Gemini Ernst & Young states: “There was no correlation between the placement of large volumes of business and providers paying higher commission rates.”

The two pieces of res-earch present conflicting findings, so why did the regulator favour one over the other and propose effectively banning the use of commission for IFAs?

The CRA research itself says “there is significant bias in the advice on a small number of single-premium products” but that the “advice market is not riddled with bias” and “there is no detectable bias on regular premium products”.

To use this as a justification for overhauling the way IFAs are paid has baffled many in the industry.

Product providers argue that the CRA research completely ignores the trend of rebating commission on single-premium investment products, which they say is prevalent.

Clerical Medical head of strategic marketing David Shelton says that, in his experience, rebating of commission takes place in 50 to 60 per cent of single-premium investment sales,a point that the research fails to mention.

Shelton says: “All they are trying to do is twisting the information to make their case. The evidence they have for commission bias is in a limited number of single-premium pro-ducts. It completely ign-ores commission rebating, which is common in these products.”

LIA director of public affairs John Ellis is not convinced by the evidence which purports to back up the claims that there is commission bias at work.

He points to the FSA&#39s open meeting on polarisation last October when head of conduct of business David Severn reported that there was no evidence of commission bias.

Ellis wonders what could have changed since then to make the FSA reverse its opinion.

He says: “I do not think the FSA research into commission bias is conclusive. The evidence for it is sketchy.

It is mainly qualitative, not quantitative, research. It looks like political manoeuvring to me.”

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Clive Boothman

Lives: Wandsworth, London.Born: May 28, 1955, London.Education: BA in politics philosophy and economics at Trinity College, Oxford. Went to school at Charterhouse in Surrey.Career: Began as a trainee chartered accountant at Ernst & Young in 1981. Joined Schroders as a research analyst for the investment division in 1983. In 1987, took charge of rebuilding Schroders&#39 […]

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